1. Chapter 15 International Accounting and Harmonisation

2. Financial Information Analysis2 Copyright 2006 John Wiley & Sons Ltd International Accounting Accounting in an international context is now an issue Various catalysts: globalisation international trade financial markets MNEs IASB and FASB now envisaging possibility of a single global accounting regime

3. Financial Information Analysis3 Copyright 2006 John Wiley & Sons Ltd Accounting blocs For historical, commercial, social and cultural reasons accounting practice varies However, possible to identify 4 blocs: Anglo-American Continental European Islamic Marxist Significant national variations within these

4. Financial Information Analysis4 Copyright 2006 John Wiley & Sons Ltd European Accounting Common origin in Italian double-entry Governance cultures: less emphasis on stock market small family-based businesses predominate less developed accounting profession legalistic accounting perspective Result is that financial reporting function less developed than Anglo-American model

5. Financial Information Analysis5 Copyright 2006 John Wiley & Sons Ltd Germany Dominance of prudence and conservatism principles as a result of economic history Subordination of accounting to law Result is legalistic, conservative accounting system Relative unimportance of stock market and accounting profession

6. Financial Information Analysis6 Copyright 2006 John Wiley & Sons Ltd Germany ctd. B/S constructed on conservative value basis aimed at government and creditors not primarily for decision-making purposes Handelsbilanz: commercial balance sheet designed to calculate profits figure that can be distributed, without compromising creditors Steuerbilanz: tax balance sheet under Massgeblichkeits principle, tax accounts based primarily on Handelsbilanz IFRS represents major catalyst

7. Financial Information Analysis7 Copyright 2006 John Wiley & Sons Ltd German corporate governance Traditionally firms seek funds from banks, not stock exchange Therefore, ownership structure much tighter fewer owners supervisory board with representatives of most significant investors cross-investment Experience of larger entities, e.g., Daimler- Benz, demonstrates limitations of this model

8. Financial Information Analysis8 Copyright 2006 John Wiley & Sons Ltd Recent Developments Governance regime limiting German companies EU and IFRS as catalysts Structures beginning to change broader shareholder base growth of Frankfurt Stock Exchange application of IFRS Growing importance of accounting profession Cromme Code of Corporate Governance Retains Supervisory Board May impact Anglo-American Model

9. Financial Information Analysis9 Copyright 2006 John Wiley & Sons Ltd France Shares some common historical experiences with Germany e.g., legacy of Italian double-entry method Nevertheless, shows some significant accounting independence central role of State in formulating practice tightly regulated: Plan Comptable General subordination of accounting to legislation

10. Financial Information Analysis10 Copyright 2006 John Wiley & Sons Ltd French Corporate Governance As in Germany, a strong stock market culture does not exist Ownership structure unique state ownership of many enterprises many small family-owned businesses cross-ownership strong influence of banks Impact of IFRS likely to be considerable

11. Financial Information Analysis11 Copyright 2006 John Wiley & Sons Ltd Recent Developments Realisation that corporate governance regime limiting French firms EU/IFRS acting as catalysts Changes beginning to emerge stronger stock exchange - Paris Bourse companies now reporting on internal controls state divesting from some larger entities accounting profession becoming proactive Viennot/Bouton Reports strengthen role of independent directors

12. Financial Information Analysis12 Copyright 2006 John Wiley & Sons Ltd Harmonisation & Convergence Greater awareness of international issues: stronger financial markets globalisation/MNEs Standardisation: ‘uniform reporting rules’ too ambitious/inappropriate? Harmonisation: ‘reduction of reporting differences’ attainable goal? given impetus by success of IASB/IFRS Possibility of convergence FASB/IASB: equivalence road map SEC making concessions on US GAAP Reconciliations

13. Financial Information Analysis13 Copyright 2006 John Wiley & Sons Ltd Summary Different accounting cultures exist Anglo-American / Continental European significant common origins important differences Anglo-American seen as more mature EU anxious to retain European aspect Harmonisation ‘project’ quite robust Increased impetus from success of IASB